Deep Habits and Exchange Rate Pass - through ∗
نویسندگان
چکیده
We propose a candidate solution to the imperfect exchange rate passthrough puzzle: habit persistence at the level of individual goods varieties. Deep habits generate a dynamic import demand function that leads to import price markup adjustments, independently of nominal pricing frictions. Augmenting a standard two-country model with deep habits, we obtain low exchange rate pass-through to import prices even when prices are relatively flexible. We match the model dynamics to those triggered by an identified shock to the US dollar exchange rate in a VAR. In the absence of deep habits, the model requires implausibly high degrees of price stickiness to match the inertial response of US import prices. JEL classification: F41
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